RENT TO OWN SHOWS THE “BUY HIGH, SELL LOW” MENTALITY OF INVESTORS

“Another all time high for rent-buy in 4Q11. The national rent-buy ratio (rent as a percentage of after-tax mortgage payments or ATMP) increased to 114.9% in 4Q11, the highest recorded level in our database which goes back to 1991. This quarter’s move represents an 810bps increase over 3Q11 and marks the fifth consecutive quarter the rent-buy ratio has been above 100%. We consider 100% the relative indifference point between renting and buying, and while there has historically been a rent-buy gap of roughly 10-20% on average, the divergence of home price and rents, combined with historically low interest rates, has reversed the trend starting in 4Q10.”

Their chart below shows Rent as a % of ATMP ramping up from 66% in Q407 to 115% in Q411. It is now notably more expensive to RENT versus OWN. How much longer will people decide to pay more by renting versus owning? Will mean reversion eventually happen?

Finally, the chart below shows the Homebuyer Affordability Composite Index from the NAR, which combines home prices and mortgage rates. As you can see, it’s at an all-time high.

It’s very reasonable that people are skittish to buy homes again coming off of the worst housing crisis this country has seen. That being said, people were euphoric buying homes at 30-40% higher levels with rates 200 basis points higher. Now with affordability at record highs, these same people are piling into rentals.

Even with the recent back-up in rates, a 30yr mortgage provides an incredible opportunity to lock in cheap funding. Many people say that taking a long term mortgage out is equivalent to being short long bonds – and that is a decent way of looking at things. This is by no means an advertisement to buy, but nonetheless it is very interesting to see the psychology of Americans. Like so many times during the stock market, it feels like they bought high and sold low.

Economic Musings was founded by David Schawel. David is a husband and father of two living in Raleigh/Durham NC. He currently works as a fixed income portfolio manager. He spent time in NYC in both investment banking and equity research. He is a current CFA charterholder.